Ready to build your dream home? Buying land is the first step. Financing land, however, can be a lot different than financing a home. If you want to finance and purchase land, it’s important to understand your land loan options.
Land Loan 101
Like a home mortgage, a land loan helps you to purchase property without a home. Typically secured by the property itself, a lender can take ownership of the property if you default on your loan. It’s important to keep in mind that securing a land loan can be harder than securing a mortgage. Why? A land loan is much riskier for lenders because borrowers have nothing to lose, other than the land itself if they find themselves in trouble.
When this happens, it’s much harder for lenders to sell if a borrower defaults on their loan. For these reasons, the terms of a land loan are often very different than that of a traditional mortgage. An example of this can be the repayment period, which is often half of that of a traditional mortgage (15 years instead of 30 years). You may also end up paying higher interest rates and needing a higher down payment (up to 50%).
Getting A Land Loan
If you’re looking to secure a land loan, it’s important to consider different lenders. Why? Many national and online lenders won’t have the local knowledge to assess whether a loan for a particular property is worth the risk. This means they probably won’t be as open to financing land as a local lender will be.
Often the best lenders for a land loan are local banks and credit unions. Why? A local lender will be more understanding of your local market. To apply for a land loan, you will need to fill out an application and provide the same information as you would a traditional mortgage. This includes employment, income, debts, and assets. You will also need a higher/established credit score and a lower-debt-to-income ratio than you would a traditional mortgage.
Keep in mind that a lender will want plenty of information about the land you are purchasing and the plans you have for it. This includes what the land is zoned for and whether it can support your proposed use. The potential value of a property can vary greatly depending on these factors.
The answers you provide can make a big difference when it comes to securing a land loan. If the land you plan on purchasing is raw and untouched, a lender might find it's a higher risk. A property with utilities, however, is much easier to secure with a land loan. Once you submit your loan application with all the necessary information, it will be approved or denied during the underwriting process.
Shopping For A Land Loan
Shopping for a land loan is a lot like finding a mortgage. Unfortunately, however, the process isn’t as easy. Instead, you will have to do plenty of research to find the right lenders in your local area to finance your land purchase.
When comparing multiple offers, it’s important to pay particular attention to any fees and interest rates. These can vary greatly from lender to lender. Take the time to obtain several quotes with line-item estimates to see what each loan offers.
Additional Land Loan Options
Construction-To-Permanent Financing.
This type of loan provides you with the money you need to purchase land if you are planning to build a home on it right away. Like a traditional mortgage, you will start off by paying on the interest of the loan. This loan also helps to pay for construction costs as your house is being built. Once construction has been completed, it then converts to a permanent mortgage.
Home Equity Loans.
If you are an established homeowner, you might want to consider a home equity loan to purchase the land. This allows you to borrow on your equity (the difference between the value of your home and the remaining balance on your mortgage). However, this number often needs to be above 20%. For example, if you have 40% equity in your home, you can borrow 20% of your home’s value. This type of loan often comes with lower interest rates than a land loan because a home is easier to sell if you default.
Seller Financing
Sometimes a seller of a property will offer financing to encourage buyers. In this scenario, a seller will set the terms of a loan and what qualifications a buyer must meet to purchase the land. If you decide to go this route, it’s important to enlist a real estate lawyer’s help to review the loan. Once you close on the loan, you will make payments directly to the seller.
Personal Loans
Last but not least, you may want to consider an unsecured personal loan to purchase land. However, it’s important to keep in mind that you may end up paying much higher interest rates with a shorter repayment period. This is often a good choice for those who want to purchase land at an inexpensive price.
Land Resellers
Buying land doesn’t have to be complicated. It just takes a little research and a good understanding of the best ways to purchase it. At Land Resellers, we help potential buyers find the property of their dreams in different parts of the country that match your unique criteria and budget. With detail-rich listings, you can view important information like land type, location, acreage, price, and other specifications. Check us out today to search for the most beautiful raw and undeveloped land, sprawling ranches, and custom home sites in the nation.